It’s a given that widespread coronavirus lockdowns are costing cities and states billions in tax revenues, but experts say that areas that rely heavily on nonresident workers to balloon their coffers are particularly vulnerable to growing fiscal stress.
For key states and cities, COVID-19 orders keeping non-essential workers at home, are also likely to keep a good portion of taxable income out of reach. Yet in places like New York — which imposes a tax on workers from other states and has a large number of people who came to the state to help relief efforts — it’s unclear how authorities will treat income earned by people now doing their jobs across borders.
“That is the million dollar question,” said Katie Quinn, a partner who specializes in state and local tax law at McDermott Will & Emory.
According to Quinn, taxpayers normally required to fork over taxes to a state or locality other than where they reside may be able to shift a portion of their income earned during the COVID-19 crisis to the state where they actually performed the work.
She added that guidance from city and state tax authorities would go a long way to help taxpayers and businesses adjust withholding.
Nathan Rigney, lead tax research analyst for H&R Block’s Tax Institute told Yahoo Finance that for a large number of people working from home, “the income that they’re earning while working from home isn’t going to be taxed by that nonresident state, and it’s not going to be taxed by that city.”
For states and cities that usually attract a large percentage of nonresident workers — especially those with high wage jobs and high taxes — the loss of income is going to “hurt, for sure,” Rigney added. These areas are already in for a revenue hit, as lockdowns undermine both retail activity, as well as performance-based income taxes usually imposed on professional athletes and entertainers.
This week, S&P Global Ratings issued a report forecasting a “sizable” downturn in state revenues, absent further federal stimulus. Already, “states are beginning to report declining revenue collections for April and tax receipts are generally below current year budget estimates,” the report stated.
The next round of proposed fiscal stimulus from Congress includes a financial lifeline to states and municipalities, but that bill is bogged down in the Senate, not certain to pass.
“We believe this sets the stage for the onset of a difficult budget year across states despite various federal stimulus efforts…to lessen the blow of an abrupt economic shutdown,” the report added.
According to Mobile Workforce Coalition (MWC), 24 U.S. states currently require nonresident workers to pay income tax on as little as a single day’s work. The organization characterizes such states as “very unfriendly” to out-of-state residents, and was formed to lobby against state income taxes on less than 30-days of work within a state’s borders.
Among the “very unfriendly” states, New York may be the most vulnerable to coronavirus-driven outflows, especially considering additional shortfalls from rising unemployment and protracted delays in returning work. The loss in revenue could deal a devastating blow.
Meanwhile, workers who reside in states where rates are lower — and would normally receive a credit in their home state for taxes paid to a nonresident state — could see a windfall.
This article was originally published on finance.yahoo.com.